Rather than sell more stock, Facebook has raised $100 million in a debt deal. Henry Blodget suggests that the company did a debt deal, as opposed to selling more stock, primarily because it was facing the prospect of a down round. Blodget continues to make the case that Microsoft overpaid for its Facebook position. I have also posted an article by Spencer Ante, a BusinessWeek writer who puts a more positive spin on the transaction. I think that Blodget’s interpretation is closer to the truth.
Cash-Burning Facebook Borrows $100mm...Because It Couldn't Sell Stock?
Henry Blodget
May 10, 2008 8:35 AM
Remember the $500 million in equity financing at a $15 billion valuation Facebook was going to raise around the time it launched Beacon last fall?
The company never confirmed that it was seeking this much, but, in any event, it didn't get it. Microsoft took $240 million, and Li Ka-Shing and a couple of Germans grabbed about another $150 million (It was reported that these investments were at the same close-to-$15 billion valuation that Microsoft paid; we've heard since that they actually weren't--that Li Ka-Shing and the Germans bought Facebook common stock, not preferred stock, and that they paid a much lower valuation for it--but we haven't been able to confirm/reject this yet).
In any event, now Facebook is taking on $100 million in debt to buy servers. Why is it borrowing the money instead of selling stock? The positive spin, brought to Spencer Ante at BusinessWeek by Facebook and debt lender TriplePoint, is that its a shame for exciting private companies to squander expensive equity on mundane stuff like servers. And that's true up to a point. (Start-up debt financing is a growing trend).
But the real reason you don't often see emerging private companies take on big debt-loads is that borrowing money is riskier than selling stock, and it also subordinates the existing equity holders. The owners of Facebook common stock, for example, now have at least $350 million of claims that have to be paid out of whatever Facebook is ultimately sold for before they get a dime. Given Facebook's current growth, this shouldn't ever be a factor, but you never know.
In any event, Google, Microsoft, Yahoo, eBay, et al, never borrowed money as private companies. And we suspect the real reason Facebook is doing so now is because it couldn't raise the rest of that $500 million round at that $15 billion valuation. Especially now, after the Beacon flop.
According to the numbers Mark Zuckerberg threw out on a conference call last fall, Facebook will burn at least $150 million of cash this year. Given the latest debt deal, we suspect the number is now expected to be considerably higher than that, and Facebook didn't want its cash balances to drop too low. It couldn't sell any more equity at $15 billion, and it didn't want to do a down round, so it turned to the debt markets.
Anyone disagree?
alleyinsider.com
Facebook: Friends with Money
The social network taps a fresh source of funds for $100 million and will buy more servers to support its growth in users and applications
May 9, 2008, 5:32PM EST
by Spencer E. Ante
Facebook is about to stuff more cash into its already full coffers. Having raised $360 million in the span of seven months, the social network has clinched another $100 million.
Palo Alto (Calif.)-based Facebook will raise the additional funds to purchase servers, powerful computers designed to ensure the site can handle a swiftly rising number of users and the dizzying array of whiz-bang applications people add to profile pages. "It will be used entirely for servers," Facebook Chief Financial Officer Gideon Yu says in an interview.
Best of all for Facebook's owners, the company will borrow the funds without having to give up equity. Typically, when startups raise money they have to give away part of the company. But Yu, formerly chief financial officer at Google's (GOOG) YouTube and a treasurer at Yahoo (YHOO), worked out a venture lending deal with TriplePoint Capital, a Menlo Park (Calif.)-based company that specializes in lending money to startups.
Venture lending peaked during the dot-com bubble of the late 1990s and early part of this decade, but is making a comeback as startups use debt to pay for computer servers, telecom gear, and software. "The last thing the entrepreneur wants to do is see those precious equity dollars flowing into equipment purchases," says TriplePoint CEO Jim Labe. "It's a very unproductive use of equity to plow it into fixed assets."
Computer Systems Arms Race
Few startups need gear as much as Facebook. Begun in 2004 by Mark Zuckerberg, Facebook is growing rapidly. In March, Facebook attracted just over 35 million users in the U.S., up 71% from nearly 21 million a year earlier, according to comScore (SCOR). Its worldwide total more than tripled to 109.2 million in the period, according to comScore. International expansion continues apace. Facebook recently launched sites in Spain and Germany, as well as a French-language site.
Facebook does not disclose the number of servers it operates. But research firm Data Center Knowledge puts the tally at about 10,000. The slug of cash will help Facebook buy approximately 50,000 more servers, giving the company "the kind of headroom they need in the next year or two," estimates Frank Gillett, a vice-president at Forrester Research (FORR).
Facebook's appetite for servers reflects the technology arms race among Internet companies that need to ensure rising user demands don't cripple the systems that support Web pages chockablock with graphics, photos, and videos. Users of the microblogging site Twitter have recently complained publicly about slowdowns and outages related to that site's fast growth.
Forrester Research's Gillett estimates that Google, owner of the world's biggest Web search engine, is buying half a million servers each year, while Microsoft's (MSFT) annual consumption is as much as 200,000 servers. "The single biggest factor for success is having available capital to build giant computing facilities," says Gillett. "It is a capital game for these guys who have gotten big and still have significant growth."
Hiring More and Expanding Abroad
Executives at Facebook declined to say which vendors will provide the servers. But the social network is already a big customer of Rackable Systems (RACK), which said in a recent financial statement that it derived $11.5 million, or 17% of $68 million in first-quarter revenue, from Facebook. The world's top server makers are IBM (IBM), Hewlett Packard (HPQ), Sun Microsystems (JAVA), and Dell (DELL).
Facebook has already raised loads of cash. In October, Microsoft invested $240 million in exchange for a 1.6% stake. Then in November and March, Hong Kong billionaire Li Ka-shing wrote two checks for a total of $120 million.
The company will no doubt use much of that financing on its overseas expansion and to broaden its employee base. Today it has 550 employees, but Facebook Chief Operating Officer Sheryl Sandberg says it will probably end the year with 700-800. Many of those workers are engineers who pull in high six-figure incomes.
Yu also says he is planning for a rainy day. "We're trying to put in place a mature capital structure for a growing company," says Yu. The executive has learned from past experience that it's always better to raise money when you don't need it. Yu became chief financial officer of NightFire Software in July, 2000, during a phase when many startups struggled to raise funds. "I tried to raise money during the bust," says Yu. "It was not fun. I will not let that happen to us."
TriplePoint's Biggest Deal
The TriplePoint lease has a degree of flexibility not offered by a traditional loan. For instance, Facebook can exchange or replace equipment during the term of the lease.
TriplePoint, started in July, 2005, by Labe, the former chief of venture leasing pioneer Comdisco Holding, has provided more than $500 million in leases and loans to more than 150 venture-backed companies, including YouTube and Slide.com. It works with startups backed by leading venture capital firms such as Kleiner Perkins Caufield & Byers, Mayfield Fund, and Sequoia Capital.
The deal with Facebook is TriplePoint's largest to date. Previously, it handled a number of transactions in the range of $30 million to $60 million. Recently, TriplePoint financed a $46 million deal with a green energy company backed by Kleiner Perkins that is in stealth mode, Labe says. "The business is on a nice upswing," he says. "The debt financing needs of these companies are increasing."
Ante is the computers department editor for BusinessWeek.
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